In a long-awaited pairing aimed at taking on Google, Yahoo will handle ad sales while Microsoft gets the real prize: data on who’s doing what online

Ever since Microsoft (MSFT) made its $45 billion bid for Yahoo (YHOO) in early 2008, it was clear the software giant was serious about taking on arch-rival Google (GOOG) in the lucrative Internet search business. And now, after years of talks with Yahoo, it seems Microsoft has achieved its goal. In a 10-year deal announced in the early hours of July 29, Microsoft became the clear No. 2 in a market long dominated by arch-rival Google.

In a deal that presages its departure from a market it helped pioneer, Yahoo will scrap its own efforts to best Google in search and instead rely on Microsoft’s recently debuted Bing search engine. Ads placed next to those search results would be served up not by Yahoo’s ad platform, dubbed Panama, but by a Microsoft technology called AdCenter. Yahoo CEO Carol Bartz “is essentially giving up on search,” says Danny Sullivan, editor of Search Engine Land.

Yahoo salespeople will continue to sell search ads that appear on both Yahoo sites and on Bing, and Microsoft agreed to let Yahoo keep 88% of the revenue on ads that appear on Yahoo sites. But Microsoft will nevertheless reap a reward that’s more valuable in the long run. The data on computer users’ online search and buying habits would ultimately reside on Microsoft’s computers, thereby improving its ability to automatically serve up the most relevant ads. “If Microsoft is running the underlying ad technology, it doesn’t matter who is selling the ads,” Sullivan says. “In the end, Microsoft will hold all the cards.”

He adds that most advertisers place ads by filling out online forms, with no involvement from salespeople. Maintaining control of sales makes the deal “sound rosier for Yahoo than it really is, because in the end Yahoo won’t have the technology needed to compete.”

INSURANCE FOR MICROSOFT AND BING

Microsoft wins in other ways. The deal gives a big boost to Bing. The combined search market share of Yahoo and Microsoft would approach 30%. That’s still far below Google’s 65%, but analysts say it may provide enough of a critical mass at least to stave off further Google advances and help the enlarged search engine gain some ground. At a minimum, the deal doubles as a kind of insurance policy for Microsoft, in case all of the positive buzz about the Bing search engine doesn’t translate into actual market share. By adding Yahoo’s 20% market share, Bing assures its place as the only search engine provider other than Google with size that really matters.

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Bing’s initial popularity among Internet searchers seems to be sticking past launch—at least it has so far. Microsoft’s recently relaunched search engine has actually gained another percentage point in the market share wars this July, according to Web metrics firm StatCounter. The firm noted that Bing was making “slow but steady” progress, and that Microsoft’s deal with Yahoo would likely only result in good things for Bing’s share of the search market.

StatCounter says that Bing climbed to 9.41 percent of the search market last month, compared to 8.23 percent in June. Combined with Yahoo’s current share of the market (10.95 percent), the two come out with 20.36 percent—still a distant second to Google’s 77.54 percent, but a relatively large slice of the pie nonetheless.

We are combining Yahoo’s and Microsoft’s share, of course, because the two announced a deal last week that would make Bing the search engine for all of Yahoo’s sites. In exchange for such prominent placement, Microsoft also gained a 10-year license to Yahoo’s core search technologies so that it can integrate whatever’s left of Yahoo’s search mojo into Bing. (As pointed out by All Things Digital, Yahoo had 20 percent share all by itself a year ago, but has deflated to half of its former glory since then.)

Bing’s growth since its makeover from Live Search is nothing to scoff at, though. Though the search engine’s share peaked at 9.21 percent during its first week, it settled down into the high 7s for a while before going back up to 8.45 percent during the last week of June. The mere fact that the number has grown a full percentage point since then shows that users are really giving Bing a chance—much more than they did for Live Search, anyway—and the underlying trend is positive.

Google remains the king of search for the time being, but according to StatCounter’s numbers, its numbers are being slowly chipped away. Google dropped from 78.48 percent in June to 77.54 percent in July, but it still owns more than three-quarters of the market; a commanding lead to be sure. Chipping away will be slow going, but Google can no longer take its search superiority for granted.

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Is Microsoft’s Bing really a better search engine? Since it debuted last month, it has earned praise for the smart way it presents results and how it lets users preview Web sites without clicking through to them.

Yet a closer look at its results reveals why loyal Yahoo users may not end up happy with the deal the company announced Wednesday, which calls for Bing to replace Yahoo Search.

ComScore Inc. says 19.6 percent of Web users go to Yahoo for their searches. Microsoft draws fewer, at 8.4 percent. That’s up just slighly from the 8 percent it captured before Bing launched at the start of June. It didn’t make a dent in Google’s commanding 65 percent market share.

I think I can see why. Not only is using Google such an ingrained habit that we talk of “googling” something, but also its technology is better in some key ways. I found Bing to be less comprehensive than Google and, surprisingly, Yahoo Search. It simply returns fewer results for a lot of search terms.

With common terms like “cars,” all the search engines return oodles of results. Yahoo reports 2.56 billion pages with that term. It doesn’t matter so much how many pages they report, as long as they give relevant results, and all do.

Then I tried to hunt for something purposely obscure, like background on the country manor that my sister is interested in buying. Google gave me 46 links, Yahoo 15. Bing supplied just six.

Of course, even in this kind of query you might not have time to look through every link. So if Bing has six and they’re good, that’s fine.

Yet in the country manor search and other cases, often at the fringes of what you’d expect the Internet to know, I found the most relevant results in Google and Yahoo only.

Years ago, search engines competed by citing their “index size” — basically, how many pages they had collected in their database. Google played this game too. But as Google grew to dominate the scene by presenting better results, Web users lost interest in the statistics. Google doesn’t make a big point of them anymore either, though it did say last year that it had more than 1 trillion Web pages catalogued.

Looking at results from Bing, it may be time to care about search index size again. That’s especially the case because in other respects, the top three engines are so similar as to be nearly indistinguishable. Nos. 2 and 3 have basically copied Google.

All of them present neat and clean search pages and advertising that’s placed through an auction process (advertisers bid for the right to show their ads alongside certain search terms, and pay the search engines when a user clicks on an ad). Search for a common term like “diapers,” and they yield nearly identical results.

They do have other little things that set them apart. Google injects a helpful little map when it finds a location among the top results. Yahoo has (or soon we might say “had”) a Search Pad application that lets you annotate your results, a useful aid in an extended research or shopping project.

Bing has earned praise for the smart way it presents certain search results. For instance it breaks down some results by category, giving you an easy way to quickly hone a search for “swine flu” with information on “symptoms” or “causes.” It will also helpfully show previous searches you’ve made in a column to the left of the results.

Bing also presents a preview of each search result if you hover your mouse cursor over it. Hover the cursor over a video, and a preview starts playing right on the results page.

Microsoft has said that it put special attention in Bing to presenting authoritative results in a few areas, like health information, but the effort seems a little superficial. When you search for “swine flu,” the Mayo Clinic’s presumably more reliable page will appear above Wikipedia’s on Bing. But if you search for “toddler fever,” the results look indistinguishable from those on the other two engines.

Bing is young. It’s possible Microsoft can make its index catch up to Yahoo’s and even Google’s, but doing so won’t happen overnight. More likely, it will take years.

That’s plenty of time for Yahoo users to discover that Bing — for all of its niceties in presentation — lacks depth. If they do, they’ll know where to go, and Google would end up being the winner on this deal.

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